| I get this phone question a lot. "Hi, I'm Bob, and I'm from | | | | Loan to Value (LTV) and credit score determine if you |
| Somewhere, Texas and I want to know what today's | | | | can truly buy or refinance a home. |
| mortgage rate is?" | | | | Now that we have the basic 5 discussed, let's address |
| It's a good question. How are rates calculated and why | | | | the overall risk of the loan and how these factors |
| would someone have a different rate than another | | | | drive the loan rate. |
| person-even f they both have identical credit scores? | | | | Employment/Income Documentation: Ever hear the |
| Some people think mortgage rates are only based on | | | | phrase, "Show me the Money!!"? Well, when buying or |
| credit scores but it today's post I'd shed some light on | | | | refinancing banks want to what you make but they |
| the other factors banks use to determine your | | | | also care how you are paid. Are you a w2 or 1099 |
| mortgage rates. | | | | type of employee? Are you self-employed or can you |
| How are mortgage rates calculated? | | | | give me tax returns to document your income? The |
| Short Answer: The current economic market | | | | safest loans-at least in the banks eyes-- are w2 |
| conditions and the loans overall risk determine the | | | | employees. Why-because these loans are fully |
| mortgage rate. | | | | documented loans-- "Full Doc"-and these loans |
| If today's mortgage rates are in the 4% range (like | | | | statistically have the lowest foreclosure statistics. |
| right after 9-11) you're going to get a better rate than | | | | The less the bank documents one's income the higher |
| right now when rates are in the mid-6%. This is an | | | | the risk. And remember, the higher the risk the higher |
| example of how the general market conditions affect | | | | the rate. |
| rates. I could go into how mortgage rates are priced | | | | Most of the foreclosures we're experiencing now |
| according to the mortgage-backed bond market but | | | | came from the 100% loans where the bank didn't |
| that's too technical for now | | | | require income documents. They simply took the |
| So, in a nutshell, the two major factors that determine | | | | client's word for it! And now banks are paying dearly |
| rates are the current economic market conditions and | | | | for it. |
| the risk of the loan. | | | | However, just because someone can't document their |
| Notice how mortgage rates go up when we have | | | | income this doesn't make them high risk. Most |
| positive economic news and down when we have | | | | self-employed people can't document all their income |
| negative economic news. This isn't always true but it's | | | | since they have business expenses they generally |
| a good rule of thumb. This is why working with an | | | | deduct. |
| experience mortgage person is so critical. If your | | | | So when I can't document the client's income, the bank |
| mortgage person just gives you a rate without doing | | | | usually will allow the loan approval-they just want this |
| his/her homework there's a danger in the loan not | | | | client to put 5-10% down. And, you guessed it, banks |
| going well-especially in today's market. | | | | charger a higher rate when I can't document all the |
| Inexperience loan officers (like bank loan officers who | | | | clients' income (since these loans have higher risk.) |
| aren't licensed) just give you rates-but rarely know | | | | Sometimes this income documentation rule goes too |
| things like "Is this a good time to lock the loan or should | | | | far in my opinion. I remember working with a physician |
| we wait to lock." Would they even know what | | | | who made 200K as a hospital employee but recently |
| economic situations might arise that could raise or | | | | started his own practice where he was guaranteed |
| lower your rate. Usually not. An experience mortgage | | | | 400K for the next two years. Could I do his loan? |
| professional will let you know what's happening in the | | | | NOPE! Why-because the bank would NOT give any |
| mortgage market since any sudden increase could | | | | value to his new, 1009 self-employment income unless I |
| cause your payment to go up unrepentantly. This is | | | | could show a 2 year history. |
| especially for jumbo home loans where ever .25% | | | | Loan Size: Here's the magic number. $417,000. If you're |
| point might represent $100 higher payment. | | | | loan is $417,000 and lower you qualify for regular |
| How are mortgage rates calculated? | | | | mortgage rates. If your loan is over $417,000 your loan |
| Long Answer: Banks price home loans according to | | | | is classified as a jumbo mortgage and therefore, you |
| the overall risk of the loan and there are 5 major | | | | guessed it, these jumbo loans come with higher rates. |
| categories to consider. | | | | Why $417K-I don't know. My guess is someone, |
| The Basic Steps to qualifying for a home loan. | | | | somewhere made this rule and their birthday was April |
| Job: How long you've been on the job? For example, a | | | | 17 (4/17) and they wanted to feel like they made their |
| person who just started a job in a new career is | | | | mark on the world. |
| considered higher risk than a person who's had the | | | | Okay...let's pause right here and look at these two |
| same job for 25 years. Most banks want to see a 2 | | | | people and see how two identical twins can have |
| year employment history. | | | | drastically different mortgage rates. |
| Credit score: I'll go into this in more detail later, but most | | | | Mike and Billy: Both have 800 credit scores. But person |
| banks want to see a 620 score. Once upon a time, | | | | make 200K. But Mike is w2 and wants to buy a home |
| you could get a 100% home loan with a 570 -but those | | | | with 20% down. His rate might be 6.25% |
| days are gone for now. Now banks want to see a | | | | But Billy, always the showboat, wants to buy a |
| 620 score or you're putting 20% down. Why is 620 | | | | $500,000 home (jumbo) and wants 100% financing. His |
| the magic number-because the PMI companies won't | | | | rate might be 8% because he's classified as a jumbo |
| insure a loan over 80% without a 620 credit score. | | | | loan and he wants 100% financing-which is the highest |
| Remember, PMI is applied to loans that exceed 80% | | | | risk loan available. |
| loan to value. | | | | So two identical twins with identical scores could get |
| PMI: Whenever you see a market-wide change in | | | | two drastically different rates because of the size of |
| lending it's usually because of the PMI companies. For | | | | the loan and the loan to value (LTV). |
| example, when banks lower or raise the general loan | | | | Loan to Value exceeding 90%: As a general rule, |
| criteria, what's really happening are the PMI companies | | | | banks want to see a 3-5% down payment. So when |
| are raising or lowering their guidelines and the banks | | | | your loan exceeds 90%--or you're putting less than |
| are simply following suite. One of the little-known | | | | 10% down the rates are higher. The less you put down |
| secrets about the mortgage market is how big a role | | | | the higher the risk, the higher the rate. Rate is tied to |
| PMI companies play. They are major driving force | | | | Risk. |
| behind bank's lending guidelines. Notice how Jim | | | | So a 5% down loan will have a higher rate than a 10% |
| Cramer of Mad Money always seems to segway into | | | | down. Therefore a 100% or 80/20 home loan will have |
| PMI companies when he's discussing the mortgage | | | | a higher rate than the 5% down. |
| market. | | | | Lower Rate: 10% à 5% à 0 down. |
| Remember, when 100% loans went away for most | | | | Higher Rate. |
| retail banks? Now you know why-PMI companies stop | | | | Debt to income: Over 45% is considered high. So if |
| insuring these loans so banks stopped offering them. | | | | your debt ratio is 50% your rate or payment may be |
| And uninsured loan is a higher risk loan. And because | | | | higher than if your debt ratio is 30%. If you're Debt |
| banks only want uninsured loans for the high credit | | | | Ratio is 55%-60% you may not qualify for the loan at |
| score borrower-usually an exit by the PMI company | | | | all unless you're willing to put more down. |
| causes and exit for the banks. | | | | Where the home is located: Up until recently, before |
| By the way, as a mortgage broker, I still offer 100% | | | | this recent foreclosure activity, where the home was |
| home loans but in the form of an 80/20. | | | | didn't really matter too much. However now, banks are |
| Debt to income ratio: This is as a biggy! This is as big | | | | limiting your loan's LTV based on where the home is |
| of an issue as your credit score. It's also known as | | | | located. Fortunately there aren't too many "foreclosure |
| "Debt Ratio" "DTI or "DR" This is the ratio of your | | | | hot spots" in Texas but other parts of the country like |
| income over your debt. For example, if someone | | | | Florida and Vegas are really getting hit hard. If you're |
| makes 10K and they have 5K in basic debt they have | | | | home is in a declining area most banks will limit your |
| a 50% debt ratio. Most banks like to see a 40-45% | | | | loan to 5% less than normal. So if you qualify for 10% |
| debt ratio. | | | | down normally, the bank would reduce your loan |
| One of my little pet peeves is when someone calls me | | | | amount to 85% and you'd have to come in with 15% |
| and asks "what's your rate-I have excellent credit | | | | plus closing costs. |
| scores." "Great, but what about your Debt to income | | | | Type of home: Single Family homes have lower rates |
| ratios" is my common response. Because a teenager | | | | than duplexes. |
| can have an 800 credit score, but can they buy a | | | | Credit scores: In general the normal credit thresholds |
| home? No. Why-because they lack the income usually. | | | | are: 620, 660, 680, 700, and 720. For some mortgage |
| This is why most professional mortgage people insist | | | | programs one simply needs a 700-720-- like with 100% |
| on getting a full application. Mortgage people don't ask | | | | financing. Other programs you'll need a 660. How |
| you all these questions because we like to spend | | | | these credit bands affect your rate is banks have |
| money on credit reports and like taking the getting pay | | | | charge higher rates for credit score less than 680. So |
| stubs, etc. It's because when we issue approval letters | | | | you may qualify for a 3% down home loan, but you're |
| of approvals we want to make sure the loan goes to | | | | rate may be higher because you only have a 640 |
| funding without any problems | | | | credit score. |
| Loan to Value Or "LTV: This simply is the ratio of the | | | | Escrows: Banks prefer you pre pay your taxes and |
| value of the home to the loan amount. For example, if | | | | insurance to them so they never have to worry if the |
| you're buying a home worth $200,000 and you're | | | | taxes and insurance are being paid. Naturally, if you |
| putting down 5% down your LTV is 95%--since you're | | | | pay your own taxes you opening the bank up to a |
| putting 5% down. In general, banks like 3-5% down. But | | | | potential tax lien and therefore they charge higher |
| the best rates are on 20% down. | | | | rates if you want to "waive escrow" or pay your own |
| So, in general, one's debt to income ratio, job, PMI and | | | | taxes and insurance. Usually this "rate hit" is .25%. |